To Grexit or Not? Politics and Greece’s Sovereign Debt Crisis

To Grexit or Not? Politics and Greece’s Sovereign Debt Crisis

By
Nikhar Gaikwad, Kenneth Scheve, Jason Weinreb
2015|Case No.P88| Length 35 pgs.

In November 2012, the Greek economy was on the precipice of collapse. Antonis Samaras, Greece’s newly elected Prime Minister, faced a difficult decision regarding the harsh terms of austerity proposed by the European Commission, European Central Bank, and the International Monetary Fund, in exchange for external support in the form of a financial bailout. If accepted, the bailout would prevent the country from defaulting on its sovereign debts, but would create blowback among domestic voters and potentially result in Samaras losing power. On the other hand, Mr. Samaras could reject the austerity demands and take a course of non-action. This would assure a bank crisis, debt defaults, and capital flight, perhaps precipitating Greece’s exit from the Eurozone altogether and the resumption of its national currency, the drachma. At stake was a decision with deep ramifications for the political and economic future of both Greece and Europe. This case explores the political economy determinants undergirding Samaras’ choice. Students evaluate the causes and consequences of sovereign debt defaults using both historical and comparative evidence, analyze the domestic economic conditions that triggered Greece’s crisis, study the role of public opinion and party politics in shaping policy outcomes, and apply theories of international cooperation in order to understand the interests and strategies of Greece’s foreign creditors. Overall, the case illustrates the complex manner in which domestic and international factors interact to shape political contestation over financial policymaking.

Learning Objective

This case introduces students to theories of sovereign borrowing and debt default. It explains how domestic political and economic considerations inform governments’ fiscal policies, and how these policies, in turn, influence and are influenced by international financial markets. Students learn how public opinion and party politics in both debtor and creditor countries shape the negotiation strategies of governments attempting to resolve debt crises, and how international institutions and common currency markets can alternately limit or expand countries’ policy options.

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